Digital Dealer - November 2019 - 10

D E A L E R OP S & M A NA GE M EN T: Bu y/S el l

By RYAN KERRIGAN
Managing Director,
Kerrigan Advisors

2019: Another
Strong Year for
Buy/Sell Activity
and Valuations
2019 is yet again a very
active year in the auto
retail buy/sell market, with
transaction activity once
again on track to exceed
200 transactions. Based on
our transaction and consulting work across the U.S. and
Canada, we have observed
three trends shaping the current buy/sell market and
setting the stage over the
coming months and
quarters.
 Improvements in dealership earnings sustain Blue
Sky Values
 Publics' stock price
appreciation portends
future acquisitions
 Lower interest rates
support an active buy/sell
market

sales. This increase drove
average blue sky up slightly
for the first time since 2015,
reversing the industry's fouryear downward trend.
The rise in profits
was driven by growth in
higher-margin business
segments, namely fixed operations and used vehicles,
which grew 5.5 percent and
2.4 percent, respectively
(see Chart I and II). Today,
used vehicles and fixed
operations, which earn
gross margins 109 percent
CHART 1

Average Dealership Fixed Operations Gross Proﬁt
2015-2019 LTM, $ in Millions

IMPROVEMENTS IN
DEALERSHIP EARNINGS
SUSTAIN BLUE SKY
VALUES

In the last four years, the
decline in blue sky values
was primarily a result of
lower earnings, rather than
declining multiples. However, after four years of slight
earnings declines, average
dealership profits rose in
the first half of 2019, despite
a reduction in new vehicle
10

NOVEMBER 2019

and 747 percent higher than
new vehicles, are the driving
force of industry profits and
collectively represent 75.9
percent of the average dealership's gross profit.
These segments are considered counter cyclical by
nature, meaning they tend
to grow when the economy
contracts. When consumers
reduce their new vehicle
purchases, they often
buy less expensive used
vehicles or keep their older
vehicles which require more

service. Many dealers, including some of the public companies, will achieve record
profits in 2019 because of the
growth in these two higher-margin segments, despite
declines in new vehicle sales.
In this regard, auto retail has
an ideally balanced business
model - when the economy is
strong, new vehicle sales are
high and profits are strong,
and when the economy is
weaker, used vehicle and
fixed operations sales grow,
maintaining dealership profitability. (See Chart 1 & 2)
Backed by these counter
cyclical revenue streams,
dealership earnings should remain strong throughout 2019
and sustain today's blue sky
values into 2020, even in the
face of a possible recession.
The fixed operations business is well-positioned to
continue its current growth
rate as electric vehicles take
an increasing share of sales.
Electric vehicle customers
have higher service retention

Source: NADA

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Digital Dealer - November 2019

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